Contest winners must be subject to a 19% withholding tax on their prizes

The tax treatment of prizes awarded in contests raises doubts regarding the withholding tax that the paying entity must apply. The Dirección General de Tributos (DGT) has specified the applicable regime for both natural persons and legal entities, depending on whether the beneficiary carries out an economic activity or is an amateur.

What the DGT has ruled

The resolution establishes differentiated criteria based on the nature of the recipient and the amount of the prize:

• Amateur natural persons: If the prize is considered a capital gain, a 19% withholding will apply to amounts exceeding 300 euros.
• Professional natural persons: If the prize constitutes income derived from an economic activity (as in the case of livestock farmers), the applicable withholding is 2%.
• Amateur legal entities: Entities receiving prizes without carrying out an economic activity in said matter must undergo a 19% withholding if the amount exceeds 300 euros.
• Professional legal entities: If the prize is part of an economic activity, no withholding will be applied under Corporate Tax (Impuesto sobre Sociedades).

What this means for you

If you are an entity that organizes and pays for contests, you must precisely identify the tax status of each winner before making the payment. It is not enough to know the amount; it is necessary to determine whether the winner acts as a professional or an amateur to apply the correct withholding rate.

For winners, this implies that the net amount received will depend directly on their professional profile. An amateur will receive a lower amount after the 19% withholding, while a professional will see a significantly lower withholding of 2% or none at all, as the case may be.

What should be done

Companies organizing contests should update their payment processes and the verification of participants' tax data. It is necessary to hold documentation that proves the professional status or economic activity of the winner to justify the applied withholding before the Tax Administration.